Microsoft Earnings: 3 Big Takeaways

Microsoft's cloud business is booming, but devices and consumer mindshare remain problems.

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Microsoft on Tuesday announced strong but slightly mixed earnings for its fiscal Q4, which ended June 30. The company's cloud businesses continued to blossom, with revenue expanding almost 150% to an annualized run rate of more than $4.4 billion. But its device efforts -- particularly the Nokia acquisition, which closed during the quarter -- continue to pose challenges.

Overall, the company's revenue reached $23.4 billion, a year-over-year increase of almost 18%. That exceeded the expectations of Wall Street analysts, who forecast closer to $23 billion. With net income of $4.6 billion, or 55 cents per share, Microsoft came in below profit estimates, however. Analysts had expected per-share earnings closer to 60 cents. In the year-ago quarter, the company's net income was $4.9 billion.

Given that CEO Satya Nadella's just-launched restructuring plan involves the biggest round of layoffs in company history, he faces pressure to accelerate the strong spots while quickly addressing weaknesses. Is Microsoft on the right track heading into its fiscal 2015? Here are three essential takeaways.

1. Microsoft's cloud services are growing rapidly. Nadella's strategy relies heavily on personalized productivity experiences that follow users via the cloud from one device to the next. On the enterprise side, these services -- which include Office 365, Azure, Exchange Online, SharePoint Online, Dynamics CRM, Lync Online, and Intune -- drove terrific business during the quarter, and, as mentioned, are now on pace for more than $4.4 billion annually. Consumers are embracing Microsoft's cloud services as well. During the quarter, the company benefited from not only Office for iPad, but also Office 365 Personal, a new low-cost option. It also aggressively bundled OneDrive storage with Office 365 plans. Thanks to these efforts, Office 365 Home and Personal subscribers now total more 5.6 million, up from 4.4 million in the previous quarter.

2. Device sales are still a black hole of profit. Nadella said Tuesday that his "mobile-first, cloud-first" mantra goes beyond mere devices, and is more about the digital experiences mentioned above. That's probably a wise way to spin his strategy, given that Microsoft's first-party device efforts are still hurting. Nokia, for example, added $2 billion in revenue to Microsoft's books, but still posted such poor margins that Microsoft ended up with lower overall profit. Similarly, the company conceded it took a charge when it decided not to release a new Surface form factor, presumably the much-rumored Surface Mini. On the bright side, company execs said the Surface Pro 3 is outselling previous models. It was released late in the quarter, however, and had only a minimal impact on the quarter's overall numbers.

During Tuesday's earnings call, Nadella spoke with an awareness of these challenges, and stressed that devices will have a smaller role in his strategies than they did in predecessor Steve Ballmer's. He talked about inventing new device types that highlight Microsoft services and set an example for partners and about responsibly building the Windows Phone businesses via a scaled-down Nokia. Microsoft said demand had been relatively decent for low-cost, low-margin Lumia smartphones, and that it plans to attack the higher end of the market with upcoming devices.

3. Windows posted a decent quarter, but long-term prospects are still unclear. Microsoft's Windows cash cow has looked vulnerable over the last year, as PC sales have slid and Windows 8 and 8.1 have flopped. But in the most recent quarter, Windows OEM revenue increased 3%, boosted by an 11% surge in Windows OEM Pro revenue. Microsoft conceded that the uptick was tied at least in part to business upgrades prompted by Windows XP's end-of-service deadline. This makes it unclear how much of the growth is sustainable. Moreover, consumer Windows revenue is falling.

Nadella offered two points of optimism for the long term. He noted that free and low-cost OEM licenses are helping device partners bring sub-$200 Windows laptops and tablets to the market, which should help Microsoft's consumer market share. He also said the next version of Windows would scale across all device types, replacing Windows 8.1, Windows RT, and Windows Phone with a single, unified OS. He didn't go into much detail, but with Windows 8.1 considered a bust, the next version needs bold changes.

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Michael Endler joined InformationWeek as an associate editor in 2012. He previously worked in talent representation in the entertainment industry, as a freelance copywriter and photojournalist, and as a teacher. Michael earned a BA in English from Stanford University in 2005 ... View Full Bio

Those numbers aren't quite right. First of all it only includes 10.9. A generally accepted number for worldwide share is closer to 7.5%. But, as I tried to point out, it the trajectory that matters. Mac is growing, Windows is shrinking. I certainly don't expect OS X to take the lead from Windows. That's not the point. But Mac share in the USA, if you don't use the incorrect numbers from Gartner and IDC, both of which were off by over 20% this past quarter, the one before, etc., Mac share is a good 14% here. It was down to 2.8% ten years ago. If that doesn't tell you something about what is happening, then nothing will.

I just wonder if those businesses expect same thing we do: phone calls and email. I know a few consumer facing, sales oriented companies are creating some iPad/iPhone apps but, in a broader business sense, these devices are not replacing the legacy Win desktops and laptops and their role in business. I'm sure you would not issue your A/P clerk an iPhone/iPad to do her job. And not likely a Mac either, just for cost reasons.

Granted, this a small sample size here (30-35 devices) but most of my users prefer Samsung Galaxy devices over iPhones. I have about 5 iPhone users (including me, I got one just because my wife had one and we could share accessories) and 25-30 Android users. You are correct not one person has even asked about getting Win phone, MS has a LOT of work to do.

Just look at the numbers. Unlike what happens in the consumer space, business and government are more selective of what they will support. The majority of phones bought in those spaces are iPhones. 70% of the tablets there are iPads. Obviously, those products do what is expected of them. Where are Windows tablets and phones?

You can't always just look at numbers and make assumptions about what people want. Consumers, in particular, buy what they think they must. If they think they need to buy Windows, they will. It certainly doesn't mean they like it. I've met a number of consumers bought a Win 8 computer, not knowing that they could, if they looked around, buy one with Win 7. Microsoft counts on this.
As for Google, they aren't in the business space. Well, hardly, with Android.
You also need to look at trajectory. Two quarter's ago Mac sales grew by 17%. This past quarter, it was 18%. I don't have the numbers for before that, but cook said during the financial conference that Mac sales out paced, in growth, Windows sales for 32 out of the past 33 quarters. You mentioned Mac marketshare. It was just 1.1% several years ago worldwide, and 2.8% domestically. How is the marketshare and sales growth of Windows doing?

I still think Android is the market leader and will remain so. There are still nascent areas such as adopting tablets for disruption. Microsoft is also in good position to take over the market for these areas as well as consumer mobile platform. There are popular devices and with the right conditions, more growth should occurr as the economy improves.

MSFT pulled out all the stops on the marketing/ad campaign for Surface and the latest Windows --- conveniently, a commercial just came on my TV. Did they report in this latest quarterly call how much they've wasted on this campaign? Perhaps the dichotomy is between B2C and B2B, and Microsoft ought to just concede defeat in B2C (excepting gaming)?

Very interesting background @Mel. Explains your very informed comments on a variety of topics.

I'm no MS lover, I program using IBM servers and support ERP systems since the 80's. So I tolerate MS as front end device. I also learned and implemented Sharepoint for our company. But other than some playing with VB 4 a long time ago, never developed in either COM or .NET. I consider that the most unproductive environment I've ever seen, all that GUID stuff.

But I see nothing Apple brings to table on either phones or tablets which is a game changer compared to MS devices. Since MS devices play well with Active Directory, Group Policy and our VPN appliances/clients, I'm not sure I agree that businesses using AD would go to Apple or Android. All those devices play well with HTML5 applications and products like Sencha Touch and Phone Gap can generate native apps for all devices. As a developer, it doesn't make any difference to me. So decision would boil down to which is easier to integrate into our network, and now that MS devices by light years. Maybe that will change but, as I said before, I haven't seen anyone swapping out their AD for anything else.

But I do have an iPhone for work so I can get email and calls when I travel. But's all I do with it for work, and all I will ever need to do with it for work. Calling it a "business" device is pushing it. I don't see making our ERP apps run on a phone, or a tablet for that matter. What would be the business case for that?

iPhones do just fine. If they didn't, then they wouldn't be the biggest choice for both business and government today. Do,you see Microsoft phones and tablets above the small single digit share there? Anywhere? No.
Can Microsoft turn that around? Maybe. But people have to want the products first, and there's little evidence that they do. Of course, there is that low single digit share, but it shrunk this year, everywhere.
I speak to business people too. Some in rather large businesses. There seems to be little interest in these Microsoft devices, despite the supposed advantages. They are indicated for some specialized functions, but overall, their maintenance is much higher than iOS devices, which is usual with Windows based machines.
So until we see larger investments being made in these devices by large organizations, I won't be convinced.
I was a principal in a large commercial photo lab for many years, until we sold it in 2004. I was one of the first labs around the world to go digital in 1988, when I bought the Crossfield system for editing and correcting photos. Then I retired from active business, though I do a lot of investing, and some advising to companies. I've been involved with computers since I took Fortran four back in high school in 1966. I designed equipment for companies such as HBO and Showtime. I did work for Microsoft, and they kept sending me tons of all their software for years, until I told them to quit. I've got a number of patents in speaker design, though most have expired. I was a partner in a professional audio electronics firm, where I designed analog and early digital equipment as well as the mentioned speakers. I used to teach PC DOS way back when, and before that, built my own S-100 bus computers, when building your own computer meant designing and building your own circuit boards, and writing your own basic, as well as converting old teletype machines to use as a printer. I programmed 3D software on VAX's. Basically, I did a lot of things, in the industry and out if it.
I find it amusing that some still insist that only Microsoft's products are truly relevant to business, when it's become glaringly obvious that it's no longer true. Microsoft has been doing a very good job in some areas, but have badly fumbled in others, and are being pushed out. IT loves Microsoft, as it gives them job security, but many business people I know can't wait to get them out of the shop.

This is the first quarter where it's been made clear that Microsoft is no longer a consumer device company. It's a server company, able to sell consumer services from cloud data centers. It has two sources of server strength: the enterprise data center and the Azure cloud.

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